SEC Filing | Franchise Group, Inc.

View:

Download DOC

Download PDF

Download XLS

Download XBRL

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 27, 2020

☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 001-35588

Franchise Group, Inc.

(Exact name of registrant as specified in its charter)



Delaware		27-3561876
(State of incorporation)		(IRS employer identification no.)

2387 Liberty Way

Virginia Beach, Virginia 23456

(Address of principal executive offices)

(757) 493-8855

(Registrant's telephone number, including area code)

1716 Corporate Landing Parkway, Virginia Beach, Virginia 23454

Former name, former address and former fiscal year, if changed since last report

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common stock, par value $.01 per share	FRG	NASDAQ Global Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.			☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares outstanding of the registrant's common stock, par value $0.01 value per share, as of August 3, 2020 was 40,029,599 shares.

FRANCHISE GROUP, INC. AND SUBSIDIARIES

Form 10-Q for the Quarterly Period Ended June 27, 2020

Table of Contents



		Page
		Number

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of June 27, 2020 and December 28, 2019	2
	Condensed Consolidated Statements of Operations for the three and six months ended June 27, 2020 and June 30, 2019	3
	Condensed Consolidated Statements of Comprehensive Operations for the three and six months ended June 27, 2020 and June 30, 2019	4
	Condensed Consolidated Statements of Stockholders' Equity for the three and six months ended June 27, 2020 and June 30, 2019	5
	Condensed Consolidated Statements of Cash Flows for the six months ended June 27, 2020 and June 30, 2019	7
	Notes to Unaudited Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4.	Controls and Procedures	51

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	52
Item 1A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3.	Defaults Upon Senior Securities	53
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	54
Signatures		57

PART I. FINANCIAL INFORMATION

ITEM 1

FINANCIAL STATEMENTS (UNAUDITED)

FRANCHISE GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets



(In thousands, except share count and per share data)	June 27, 2020			December 28, 2019
Assets	(Unaudited)			(Audited)
Current assets:
Cash and cash equivalents	$	105,473		$	39,581
Current receivables, net	111,857			79,693
Inventories, net	315,078			300,312
Other current assets	24,298			20,267
Total current assets	556,706			439,853
Property, equipment, and software, net	152,520			150,147
Non-current receivables, net	15,105			18,638
Goodwill	468,088			134,301
Intangible assets, net	145,887			77,590
Operating lease right-of-use assets	529,891			462,610
Other non-current assets	15,434			15,406
Total assets	$	1,883,631		$	1,298,545
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term obligations	$	203,490		$	218,384
Current operating lease liabilities	130,307			107,680
Accounts payable and accrued expenses	222,461			158,995
Other current liabilities	38,008			16,409
Total current liabilities	594,266			501,468
Long-term obligations, excluding current installments	537,148			245,236
Non-current operating lease liabilities	426,255			394,307
Other non-current liabilities	35,253			5,773
Total liabilities	1,592,922			1,146,784

Stockholders' equity:
Common stock, $0.01 par value per share, 180,000,000 and 180,000,000 shares authorized, 35,185,710 and 18,250,225 shares issued and outstanding at June 27, 2020 and December 28, 2019, respectively	352			183
Preferred stock, $0.01 par value per share, 20,000,000 and 20,000,000 shares authorized, 0 and 1,886,667 shares issued and outstanding at June 27, 2020 and December 28, 2019, respectively	—			19
Additional paid-in capital	249,525			108,339
Accumulated other comprehensive loss, net of taxes	(2,103		)	(1,538		)
Retained earnings	42,935			18,388
Total equity attributable to Franchise Group, Inc.	290,709			125,391
Non-controlling interest	—			26,370
Total equity	290,709			151,761
Total liabilities and equity	$	1,883,631		$	1,298,545

See accompanying notes to condensed consolidated financial statements.

FRANCHISE GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)



	Three Months Ended						Six Months Ended
(In thousands, except share count and per share data)	June 27, 2020			June 30, 2019			June 27, 2020			June 30, 2019
Revenues:
Product	$	466,709		$	—		$	940,214		$	—
Service and other	28,742			23,820			131,383			119,658
Rental	17,176			—			33,596			—
Total revenues	512,627			23,820			1,105,193			119,658
Operating expenses:
Cost of revenue:
Product	277,582			—			565,400			—
Service and other	701			—			1,456			—
Rental	5,508			—			11,450			—
Total cost of revenue	283,791			—			578,306			—
Selling, general, and administrative expenses	217,264			29,482			469,476			70,447
Total operating expenses	501,055			29,482			1,047,782			70,447
Income (loss) from operations	11,572			(5,662		)	57,411			49,211
Other expense:
Other	(6		)	(106		)	(4,064		)	(99		)
Interest expense, net	(31,626		)	(415		)	(57,378		)	(1,470		)
Income (loss) before income taxes	(20,060		)	(6,183		)	(4,031		)	47,642
Income tax expense (benefit)	1,882			(928		)	(43,987		)	14,706
Net income (loss)	(21,942		)	(5,255		)	39,956			32,936
Less: Net (income) loss attributable to non-controlling interest	269			—			(2,090		)	—
Net income (loss) attributable to Franchise Group, Inc.	$	(21,673	)	$	(5,255	)	$	37,866		$	32,936

Net income (loss) per share of common stock:
Basic	$	(0.62	)	$	(0.37	)	$	1.30		$	2.34
Diluted	(0.62		)	(0.37		)	1.29			2.33

Weighted-average shares outstanding:
Basic	34,972,364			14,062,766			29,173,172			14,059,279
Diluted	34,972,364			14,062,766			29,335,633			14,124,104

See accompanying notes to condensed consolidated financial statements.

FRANCHISE GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)



	Three Months Ended						Six Months Ended
(In thousands)	June 27, 2020			June 30, 2019			June 27, 2020			June 30, 2019
Net income (loss)	$	(21,942	)	$	(5,255	)	$	39,956		$	32,936
Other comprehensive income (loss)
Unrealized loss on interest rate swap agreement, net of taxes of $(3), $(13), $(31) and $(21), respectively	(7		)	(34		)	(80		)	(55		)
Foreign currency translation adjustment	381			113			(491		)	341
Forward contracts related to foreign currency exchange rates	4			18			6			—
Other comprehensive income (loss)	378			97			(565		)	286
Comprehensive income (loss)	(21,564		)	(5,158		)	39,391			33,222
Less: comprehensive (income) loss attributable to non-controlling interest	269			—			(1,915		)	—
Comprehensive income (loss) attributable to Franchise Group, Inc.	$	(21,295	)	$	(5,158	)	$	37,476		$	33,222

See accompanying notes to condensed consolidated financial statements.

FRANCHISE GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders' Equity (Unaudited)



	Three Months Ended June 27, 2020
(In thousands)	Common stock shares	Common stock		Preferred stock shares		Preferred stock			Additional paid-in-capital			Accumulated other comprehensive loss			Retained earnings			Total Franchise Group equity			Non-controlling interest			Total equity
Balance at March 29, 2020	29,653	$	297	1,099		$	11		$	237,354		$	(2,306	)	$	73,652		$	309,008		$	20,013		$	329,021
Changes and distributions of non-controlling interest in New Holdco	—	—		—		—			19,919			(175		)	—			19,744			(19,744		)	—
Net loss	—	—		—		—			—			—			(21,673		)	(21,673		)	(269		)	(21,942		)
Total other comprehensive income	—	—		—		—			—			378			—			378			—			378
Exercise of stock options	23	—		—		—			186			—			—			186			—			186
Stock-based compensation expense, net	15	—		—		—			1,817			—			—			1,817			—			1,817
Conversion of preferred to common stock	5,496	55		(1,099	)	(11		)	(9,751		)	—			—			(9,707		)	—			(9,707		)
Dividend declared ($0.25 per share)	—	—		—		—			—			—			(9,044		)	(9,044		)	—			(9,044		)
Balance at June 27, 2020	35,187	$	352	—		$	—		$	249,525		$	(2,103	)	$	42,935		$	290,709		$	—		$	290,709



	Six Months Ended June 27, 2020
(In thousands)	Common stock shares	Common stock		Preferred stock shares		Preferred stock			Additional paid-in-capital			Accumulated other comprehensive loss			Retained earnings			Total Franchise Group equity			Non-controlling interest			Total equity
Balance at December 29, 2019	18,250	$	183	1,887		$	19		$	108,339		$	(1,538	)	$	18,388		$	125,391		$	26,370		$	151,761
Changes and distributions of non-controlling interest in New Holdco	—	—		—		—			23,744			(175		)	—			23,569			(25,927		)	(2,358		)
Net income	—	—		—		—			—			—			37,866			37,866			2,090			39,956
Total other comprehensive loss	—	—		—		—			—			(390		)	—			(390		)	(175		)	(565		)
Exercise of stock options	23	—		—		—			186			—			—			186			—			186
Stock-based compensation expense, net	18	—		—		—			4,265			—			—			4,265			—			4,265
Issuance of common stock	7,462	75		—		—			123,019			—			—			123,094			—			123,094
Conversion of preferred to common stock	9,434	94		(1,887	)	(19		)	(10,028		)	—			—			(9,953		)	—			(9,953		)
Dividend declared ($0.25 per share)	—	—		—		—			—			—			(15,677		)	(15,677		)	—			(15,677		)
Adjustment	—	—		—		—			—			—			2,358			2,358			(2,358		)	—
Balance at June 27, 2020	35,187	$	352	—		$	—		$	249,525		$	(2,103	)	$	42,935		$	290,709		$	—		$	290,709

See accompanying notes to condensed consolidated financial statements.

FRANCHISE GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders' Equity (Unaudited)



	Three Months Ended June 30, 2019
(In thousands)	Common stock shares		Common stock		Preferred stock shares	Preferred stock		Additional paid-in-capital			Accumulated other comprehensive loss			Retained earnings			Total Franchise Group equity			Non-controlling interest		Total equity
Balance at April 1, 2019	14,058		$	141	—	$	—	$	12,632		$	(1,830	)	$	90,224		$	101,167		$	—	$	101,167
Cumulative effect of adopted accounting standards, net	—		—		—	—		—			—			322			322					322
Net loss	—		—		—	—		—			—			(5,255		)	(5,255		)	—		(5,255		)
Total other comprehensive income	—		—		—	—		—			97			—			97			—		97
Cancellation of common stock	(9	)	—		—	—		(88		)	—			—			(88		)			(88		)
Stock-based compensation, net	51		—		—	—		639			—			—			639			—		639
Balance at June 30, 2019	14,100		$	141	—	$	—	$	13,183		$	(1,733	)	$	85,291		$	96,882		$	—	$	96,882



	Six Months Ended June 30, 2019
(In thousands)	Common stock shares		Common stock		Preferred stock shares	Preferred stock		Additional paid-in-capital			Accumulated other comprehensive loss			Retained earnings		Total Franchise Group equity			Non-controlling interest		Total equity
Balance at January 1, 2019	14,044		$	140	—	$	—	$	12,091		$	(2,019	)	$	52,029	$	62,241		$	—	$	62,241
Cumulative effect of adopted accounting standards, net	—		—		—	—		—			—			322		322			—		322
Net income	—		—		—	—		—			—			32,936		32,936			—		32,936
Total other comprehensive income	—		—		—	—		—			286			—		286			—		286
Cancellation of common stock	(9	)	—		—	—		(88		)	—			—		(88		)	—		(88		)
Exercise of stock options	14		—		—	—		153			—			—		153			—		153
Stock-based compensation, net	51		1		—	—		1,027			—			—		1,028			—		1,028
RSU dividend accrual	—		—		—	—		—			—			4		4			—		4
Balance at June 30, 2019	14,100		$	141	—	$	—	$	13,183		$	(1,733	)	$	85,291	$	96,882		$	—	$	96,882

See accompanying notes to condensed consolidated financial statements.

FRANCHISE GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)



	Six Months Ended
(In thousands)	June 27, 2020			June 30, 2019
Operating Activities
Net income	$	39,956		$	32,936
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for doubtful accounts	3,403			4,770
Depreciation, amortization and impairment charges	33,792			7,772
Amortization of deferred financing costs	21,554			358
Loss (gain) on disposal of fixed assets	(166		)	270
Stock-based compensation expense - equity awards	4,339			1,047
Loss (gain) on bargain purchases and sales of Company-owned offices	(1,258		)	424
Equity in loss of affiliate	15			1
Deferred tax expense	7,739			742
Change in
Accounts, notes, and interest receivable	(1,784		)	1,380
Income taxes receivable	(53,156		)	13,341
Other assets	1,015			1,870
Accounts payable and accrued expenses	134			222
Inventory	84,434			—
Deferred revenue	8,938			(1,538		)
Net cash provided by operating activities	148,955			63,595
Investing Activities
Issuance of operating loans to franchisees and ADs	(28,876		)	(44,346		)
Payments received on operating loans to franchisees and ADs	49,612			66,204
Purchases of Company-owned offices, AD rights, and acquired customer lists	(2,299		)	(404		)
Proceeds from sale of Company-owned offices and AD rights	989			22
Acquisition of business, net of cash acquired	(353,423		)	—
Purchases of property, equipment, and software	(16,212		)	(647		)
Net cash provided by (used in) in investing activities	(350,209		)	20,829
Financing Activities
Proceeds from the exercise of stock options	187			153
Dividends paid	(10,406		)	—
Non-controlling interest distribution	(4,716		)	—
Repayment of other long-term obligations	(410,798		)	(16,178		)
Borrowings under revolving credit facility	142,000			93,874
Repayments under revolving credit facility	(112,760		)	(161,128		)
Issuance of common stock	92,082			—
Payment for debt issue costs	(14,604		)	(2,260		)
Issuance of debt	586,000			—
Cash paid for taxes on exercises/vesting of stock-based compensation	(73		)	(21		)
Net cash provided by (used in) financing activities	266,912			(85,560		)
Effect of exchange rate changes on cash, net	(234		)	131
Net increase (decrease) in cash equivalents and restricted cash